Rolling, Rolling, Rolling

Today's appreciation in agriculture land values is reminiscent to some of the late '70s boom that turned into a mid '80s nightmare. But experts say the higher equity of today's transactions should preclude a repeat.

It was Jan. 6, 2003, that Jim Almond his cousin, Bob Grierson, and their wives finalized the sale — almost lock, stock and barrel — of J.B. Grierson Co., their family's 123-year ranch legacy in the lush grass country of south central Montana.

That day, proprietorship of a total of about 78,000 deeded and 85,000 leased acres was transferred to a new owner. Included in the transaction were some of the ranch equipment, and nearly 3,000 head of commercial Angus females selected and mated for decades for foraging ability and high meat-quality offspring.

“The new owner also retained most of the work staff,” Almond says. “That was a key goal for us.”

Almond and Grierson were raised and involved in the operation much of their lives, so the sale wasn't without considerable soul-searching, he says.

“The reality is ranching is a business, and our kids, seven of them between us, weren't real keen to come back. We faced up to the reality,” Almond says.

For sellers like Almond and his cousin, the timing could hardly have been better. Agriculture land values, particularly those for ranchland, have been rising faster than a 4-year-old on Christmas morning. In fact, experts say that — even given the record cattle prices of the past two years — much of the land at today's appreciated prices can't cash flow with cattle alone (see “A Losing Proposition,” page 28).

Farm real estate values, a measurement of all land and buildings on farms, averaged $1,510/acre on Jan. 1, 2005, up 11% from 2004, USDA reports. This was the largest percentage increase since 1981, when farm real estate values also rose by 11% from the previous year.

Cropland and pasture values rose by 11% and 9%, respectively, in 2004, USDA says, with cropland values averaging $1,970/acre and pasture values averaging $694/acre on Jan. 1, 2005. Compare those figures to the $1,770 and $634/acre, respectively, on Jan. 1, 2004. (See “Pasture Greened In 2004” on page 12 of this issue.)

Cattle don't drive the trend

“Cattle prices aren't driving these land values, I'll tell you that,” says Paul Bierschwale, ARA, Junction, TX, a farmland appraiser since 1977 and president of the American Society of Farm Managers and Rural Appraisers (ASFMRA). ASFMRA is a Denver, CO-based, non-profit entity of members who together manage more than 25 million acres of farm and ranchland for absentee owners, banks and trusts in the U.S, Mexico and Canada.

“Across the U.S., we've seen very strong appreciation the last three to five years in ranchland. Of course, the closer the land is to a metro area, the higher the rate of appreciation,” Bierschwale says.

Besides a yearning for recreational land, other oft-cited factors for the bloom in agriculture land values include generous government-support programs (see “Where Government Payments Matter Most,” page 8), attractive long-term interest rates, high commodity prices, the movement of investors away from a lackluster stock market, and 1031 tax exchanges.

Utilizing the 1031 tax exchange option, property sellers can avoid capital gains taxes on a sale of land if they identify “like-kind” property within 45 days, and consummate the deal within 180 days. (See “The Exchange Factor” on page 22 of this issue.)

Moe Russell of the Russell Consulting Group, Panora, IA, says 1031 tax exchanges “have definitely had an effect by people selling high-priced land near metro areas in order to reinvest the money in more economical land in areas that are more rural.” He and partner, Terry Jones, provide financial and marketing consulting to farmers and ranchers in 24 states stretching east to west from Pennsylvania to Colorado, and north to south from Canada to the Gulf of Mexico.

“Certainly low-interest rates have helped, as well,” Russell points out. “And even though short-term interest rates have increased of late [the Federal Reserve hiked its prime rate Jan. 31 to 4.5%, its 14th rate hike in a row since June 2004], long-term rates are still at a 40-year low. Plus, profitability in the beef industry has been very good.”

It's a sentiment echoed by John Menzies of JPMorgan Chase Bank, N.A. Farm and Ranch Management Department in Ft. Worth, TX. The men in this department oversee about 2 million acres held in Trust and Agency accounts throughout the country.

“Values in our area, and throughout much of the country, have been driven by recreational use, and we continue to see a high level of interest,” Menzies says. “People are putting a lot of money into recreational lands, and land is appreciating at a faster growth rate than ever before. In many areas of Texas, this growth rate is competing with other investment returns. When you can get 1-2% return in cash flow, and 6-8% in value appreciation, that's very attractive.”

Buyers & sellers aplenty

Of course, willing sellers are as much a part of the land transaction business as willing buyers.

“Each person has his own tipping point,” Menzies says. “For some, it's the opportunity to take advantage of current equity in one particular parcel and reinvest in other parcels in different markets. For others, their age is an important factor. For example, if a rancher is ready to retire and he's sitting on $1,250/acre ground, he might decide it's a good time to get out, retire, and go in a fixed-income direction.”

And that's not a factor to minimize. For instance, Michael Duffy, an Iowa State University Extension economist, says nearly half of Iowa's farmland is owned by people older than 65 years.

Bierschwale is based in the Hill Country near Kerrville, TX, but his predominant client area is west of Interstate-35 in Texas, as well as Oklahoma, New Mexico, Arizona and Louisiana. He says the Texas Hill Country, in particular, has been one of the highest land-appreciation markets in the region, appreciating at a 10-15% clip for the past 3-5 years.

Bierschwale says that, while farmers dominated the land buying in Texas in the mid '90s, consumers and investors dominate the market today. He estimates that less than 10% of ranchland changing hands in his area today is being purchased by existing cattle producers. “But most of those buyers will put cattle on the land for the property tax advantages,” he says.

History's painful lessons

Bierschwale likens the current-day appreciation rate in agricultural land to that of the last 1970s and early 1980s.

“We know how that experience turned out,” he says, “but the difference today is the abundance of cash buyers in the market. I don't see anything ahead to bust this thing, but it has to slow down.”

Menzies agrees, characterizing the land boom of the '80s as highly leveraged compared to today's agriculture land market.

“In the '80s, almost 90% of the money in the market was borrowed money. Today, people are buying land with as much as half down, so the bottom in today's market is more secure. It's predominantly new money moving into the market today,” he says.

Another difference, Russell adds, is the demand by today's buyer for recreational land. It wasn't a big motivator in the rural land purchases of 20-30 years ago.

“I don't believe the bottom of this market will fall out,” he says. “There's so much more equity in the market today, and interest rates aren't nearly as high. In the 1970s, many farmers accumulated extensive debt from aggressive farmland acquisitions. When the prime soared to nearly 20% in the early 1980s, the cost of servicing that debt forced many to sell. Agriculture learned some valuable lessons in those years — both lenders and producers.”

So what should a producer with an itch to expand do in the face of today's land prices? Russell advises discipline and patience.

“At this stage, I'm telling folks involved in cattle production to keep their powder dry. A lot of producers think they have to chase these prices; they get impatient and frustrated,” Russell says. “They need to concentrate on maintaining good liquidity in their operations to be ready and able to take advantage of the good opportunities when they come up. And they will come up.”

Mike Fritz, editor of Farmland Investor Letter, advises readers of his September 2005 issue, given current market conditions, to “save cash, pay down debt and wait for more attractive opportunities.”

Russell and Menzies say producers looking to expand in today's market should seriously consider leasing land rather than buying it. “It's the smarter move, in most cases,” Russell says.

Menzies adds: “Lease rate per cow unit is far less than the purchase price of a cow unit spread over time. If you can lease it and you can afford it, I recommend leasing. But be sure to have that lease structured so there's an escape clause in the event of drought or sale.”

Introducing Mike Fritz

In planning and producing this 2006 Cow-Calf Issue, BEEF editorial staff enlisted the help of Mike Fritz, owner of Mercator Research LLC, in Monona, WI. Fritz is editor and publisher of Farmland Investor Letter®, a monthly subscription newsletter providing farmland market insight and intelligence for farmland investors and managers.

A native of Harvard, IL, Fritz grew up on a diversified crop and cattle-feeding operation and earned a degree in agronomy from Purdue University. His previous work experience includes stints as an editor, writer and reporter with Hog Farm Management and Feedlot Management magazines in Minneapolis, MN; Forbes in New York City; and Crain Business Publications in Chicago, IL. He can be reached at [email protected] or visit www.farmlandinvestorletter.com.